Federal Reserve Hikes US Interest Rate by 0.75% Point

For the second consecutive month, the Federal Reserve raised U.S. interest rates by three-quarters of a percentage point in an effort to curb inflation running at a four-decade high.

The latest monetary policy decision from Federal Open Market Committee brings the federal funds rate to a range of 2.25%-2.5%. Bitcoin’s price was little changed after the announcement.

The aggressive move, which follows a similar hike in June, could keep pressure on markets, including cryptocurrencies like bitcoin (BTC).

Federal Reserve Hikes US Interest Rate by 0.75% Point

This is the fourth time the U.S. central bank has raised interest rates this year, bringing the federal funds rate (the rate at which commercial banks borrow and lend their excess reserves to each other overnight) to a range between 2.25%-2.5%.

“Recent indicators of spending and production have softened,” said a statement by the Federal Open Market Committee (FOMC), a group of 12 Fed officials who set the Fed’s monetary policy. “Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the [coronavirus] pandemic, higher food and energy prices, and broader price pressures.”

The Fed’s decision to raise the fed funds rate by three-quarters of a percentage point, or 75 basis points, is no surprise to traders, who bet on a 74% chance that central bankers would decide for a move of that size, as shown by the CME FedWatch Tool.

After the consumer price index (CPI) in June showed a much higher than expected inflation rate, traders briefly bet that a 100 basis point rate hike was more likely. However Fed officials said shortly after the CPI release that they favored another 75 basis point increase.

“Powell would not rule out a 75-basis point rate increase for the next meeting, but he did say that it will likely be appropriate to slow rate increases at some point. It seems traders aren’t thinking another large move will be justified in September,” said Edward Moya, Oanda senior market analyst for the Americas. “The FOMC decision provided optimism that the end of tightening is in sight and that triggered a nice rally for risky assets that helped elevate cryptos.”

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Bitcoin price

Bitcoin’s price rose 3.6% in the hour after the decision as Fed Chair Powell said that another unusually large interest-rate increase will depend on incoming data – an indication that another 75 basis point increase is far from assured.

“We have seen the rate increases already have a major role in why public bitcoin mining companies and even companies like Tesla [TSLA] sold off their BTC to shore up their cash reserves as access to capital and costs of borrowing continue to rise,” said Howard Greenberg, cryptocurrency educator at Prosper Trading Academy.

“But I am more focused on the current correlation between BTC and the Nasdaq 100 [stock index], and if these rate increases and unwinding of the balance sheet allow BTC to break that correlation and start to act as the hedge against this type of quantitative tightening,” he said.

Central bankers started reducing the size of the Fed’s $8.5 trillion balance sheet in June in an effort to bring it back down toward the pre-pandemic level, closer to $4 trillion. In September the pace of reduction will get more aggressive, with a potential roll-off of $95 billion a month.

But the fed funds rate will likely remain the Fed’s primary tool for quantitative tightening, with central bankers hoping to raise interest rates to a range of 3.25%-3.5% by the end of this year – an unusually fast pace of monetary tightening given the rate was near zero just four months ago.

After Wednesday’s decision, traders will be closely monitoring Thursday’s gross domestic product (GDP) report released by the U.S. Bureau of Economic Analysis (BEA), which could show the U.S. economy slowed in the second quarter of the year, suggesting the economy is in a recession, according to one definition.

Source:coindesk.com

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